By Greg Jankowski
The holidays may be known for sugar and spice and everything nice, but for high-net-worth individuals, they offer a prime opportunity for charitable gifting. While cash donations are an obvious play, gifting appreciated stock, or contributing to causes through a donor advised fund may actually offer more perks – both for the donor and for the recipient.
Charitable Gifting of Securities
Provided that you itemize your tax deductions, donating appreciated securities may offer better tax benefits, on the condition that the securities have been held for at least one year. After this one-year holding period, you’re typically able to deduct the current fair market value of the securities as opposed to the cost basis (the amount originally paid for the securities).
This strategy is much more tax efficient than selling the securities outright and then donating the proceeds, as it enables you to avoid the capital gains tax due on the sale. For high-net-worth investors, this could amount to significant savings by avoiding federal capital gains tax, state tax, and the Medicare surcharge tax. This way, the charity can receive the full benefit of your generosity, not what’s left over after Uncle Sam has taken a cut.
Cash, on the other hand, can then be used to repurchase the securities that were just gifted, thus locking in a higher cost basis for those securities. This higher cost basis ultimately means a lower tax bill if the subsequent securities are sold for profit.
Periodically pruning some appreciated shares through charitable gifting may also let you rebalance your portfolio alongside your philanthropic intent, and thus maintain your target risk exposure. This means more of your money goes toward fulfilling your charitable intent, and your tax deductions may increase as well. You can deduct up to 30% of your adjusted gross income on charitable contributions of appreciated securities in most cases.
Why Donor Advised Funds?
Should you decide to gift securities, donor advised funds (DAFs) reward your generosity with a process that’s easy and precise. DAFs allow you to direct gifts to select causes in precise amounts, and with the exact timing that suits your requirements. Best of all, this can typically all be accomplished with minimal effort.
Setting up a DAF at a financial institution is easy, and DAFs typically offer low operating costs which can ensure maximum effectiveness of your philanthropic activity. The mechanics of DAFs are straightforward, and you can name a successor trustee in the setup process. Once the fund is established, you can donate appreciated stock and/or cash into a separate account. You retain full control over the disbursement of your gifts, which can be stretched out over any number of years to support the causes you choose. No matter when the gifts are distributed, you receive an immediate deduction on your donation. Working with an advisor to oversee this charitable gifting process will help ensure that your philanthropic goals are properly targeted by your donations.
Keep in mind that gifts into a DAF are irrevocable. In addition to cash and securities, charitable gifts may include real estate, collectibles, and many other alternative assets that aren’t publicly traded.
Today’s technology makes it simple to flexibly manage your donations from a computer or smartphone. One of the main advantages often available with a DAF structure is that the donation process can be noticeably simpler than through traditional channels. The traditional gifting process can be cumbersome, and may require hefty amounts of paperwork to organize a gift. With DAFs, however, gifts can often be executed simply with a couple of clicks on a smartphone. Thus, even small donations you may be considering for the causes you support are more feasible through a DAF compared to the traditional operational aspect of charitable gifting.
Checking the List on Charitable Gifting through DAFs
The question really becomes, why not donate through DAFs? The perks of charitable gifting through DAFs are clear:
- Appreciation on assets receives tax-free treatment
- Capital gains tax is waived on donated appreciated securities (if held for at least one year), meaning extra funds for the charity
- You decide where, when, and how much to give
- You enjoy maximum tax deductions on appreciated stocks (as long as you itemize)
- Charitable gifting is maximized through diverse contributions that may include cash, publicly traded entities, and alternative assets such as real estate
Please talk with your financial advisor if you’re interested in a making a charitable donation of appreciated stock through a donor advised fund. It’s important to understand the rules around charitable gifting, the risks associated with investing, and all fees/costs that may be involved.
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About the author: Greg Jankowski is Vice President – Financial Advisor at Delphi Private Advisors. The firm offers institutional wealth management in a boutique, personalized service model for high-net-worth individuals and family foundations. Greg can be reached via email at Greg@delphiprivate.com.
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